Interesting piece about the rough and tumble world of US cannabis investment..Pot unlucky would be an understatment
When the authorities in Plumas County, California, inspected a new commercial hemp plantation in April 2019, they were so alarmed by what they found that they sought to impose a temporary moratorium on the emerging industry in unincorporated local towns.
Greeted at the property by two armed guards with false identification papers, the local authorities found “one of, if not the largest, hemp operation in the state of California” with trees cut down and carted away, greenhouses going up and drainage being built without permits, they said at a public hearing two months later.
Representatives of Genius Fund, the cannabis-focused start-up based in Los Angeles that was developing the roughly 1,000-acre spot — the size of about 750 American football fields — told Plumas authorities they were cooperating with two research universities, tapping a California legal loophole that would allow them to begin operations without all the permitting. However, Plumas officials said they contacted the universities and neither confirmed a relationship with the company. Shortly thereafter, Genius Fund left the county.
“It demonstrates a flagrant disregard for our county, our rules, our regulations, our building codes,” then Plumas County Sheriff Greg Hagwood told the June 4, 2019 hearing. “To engage in something this flagrant speaks to a frame of mind. And I find it very disturbing and I find it unacceptable.”
It was just the start of the troubles Genius Fund would face over the next 12 months as it aggressively sought to carve out a chunk of the multibillion-dollar California cannabis market. Today, the phones at the company are silent, corporate e-mails bounce, the company’s website is down, and counterparties are starting to sue.
Genius Fund might have been just another failed and forgotten cannabis business — the ranks of which are growing as the COVID-19 pandemic impacts operations — had a former senior employee not filed an eye-opening lawsuit in a California court on April 24 claiming its billionaire owner, Dmitry Bosov — who died weeks later in what Russian authorities said was a suspected suicide — had blown $165 million on the operation without generating much revenue.
The lawsuit goes on to claim that Bosov had his U.S. visa rescinded in the midst of launching the vertically integrated business and, as it imploded a year later, transferred ownership in March to his Soviet-born, New Jersey-based friend and adviser — a man with an opaque employment history who goes by multiple names and who, in 2018, was caught up in a bizarre international chess scandal involving a longtime Russian regional leader who is under U.S. sanctions and once claimed to have been abducted by space aliens.
Bosov and adviser Igor Shinder, the lawsuit alleges, had created a Byzantine corporate structure with more than 60 “sub-entities” at its height and were now transferring assets and selling off assets to avoid creditors, a claim the defendants rejected.
The list of people involved with the fund has included a managing partner whose father is a former Russian cabinet minister now jailed and awaiting trial on an embezzlement charge, two new board members who are partners of a former FBI director, a U.S. Army Special Forces veteran, and several young tech executives with little to no experience in cannabis or running large businesses.
Bosov, 52, was found dead May 6 at his sprawling mansion outside Moscow with a bullet wound to the head from his own pistol, law enforcement authorities said — reportedly after locking himself in the fitness room. He was the beneficial owner of the Genius Fund, according to documents submitted as part of the civil complaint filed by Francis Racioppi, who worked at the company for about a year, including briefly serving as CEO.
Daniil Abyzov, son of billionaire former Russian Minister of Open Government Mikhail Abyzov, was one of three managing partners at Genius Fund, according to its now defunct website. However, he left the company earlier on, an employee who asked not to be named, told RFE/RL. Daniil Abyzov — also known as Danny — could not be reached by RFE/RL on a mobile phone that had been registered under his name.
Mikhail Abyzov, reportedly a close friend of Bosov and rumored to have been a partner in his coal business, was arrested in Russia in 2019 on suspicion of stealing $62 million from a Siberian power-supply company and moving the money offshore.
He was a cabinet minister between 2012 and 2018, and is considered a close associate of Dmitry Medvedev, who was Russia’s president from 2008-12 and then prime minister until President Vladimir Putin dismissed him in January.
After leaving the government in 2018, Mikhail Abyzov briefly lived in the United States around the same time Bosov was launching his cannabis business.
Bosov, who had a net worth of $1.1 billion according to Forbes Magazine — which listed him 86th among Russians in terms of wealth — began building his fortune in the violence-plagued Russian aluminum industry in the 1990s, when he was reportedly the right-hand man of Michael Chernoy, then one of the nation’s richest people.
Bosov sold his stake in the Krasnoyarsk Aluminum Plant and invested in a Siberian oil producer in 2004 just as energy prices were taking off, multiplying his fortune. He later left that business to focus on coking coal, creating Siberian Anthracite in the 2010s.
He also co-owned an Arctic-based coal business with Aleksandr Isayev, a member of Siberian Anthracite’s board. In April, Bosov removed Isayev from all positions, including co-ownership, accusing him of “egregious abuse and theft.”
Bosov controlled 80 percent of Genius Fund through his offshore holdings Alltech Group and Goldhawk Investments. The court documents did not state who owned the rest, but the company’s founders — Ari Stiegler, 28, and his business partner Gabriel Borden — could possibly own some if not all. Anyone owning 20 percent or more of a cannabis company in California has to inform state regulators.
Racioppi, a former Army Special Forces member who The Wall Street Journal reported was forced out of social-media giant Snap over an affair with a contractor, claims Bosov “concealed and misrepresented the true and equitable owners of the Genius Fund” though without stating how and to whom. There are no restrictions on foreigner ownership of cannabis companies in California. Neither Racioppi nor his lawyer responded to requests for comment.
RFE/RL has yet to receive an answer to a public information request filed with Californian authorities in an attempt to determine who registered as owners of the Genius Fund.
Shinder, after gaining control and ownership in mid-March, fired all existing staff — roughly 180 employees — “with no exception,” citing the COVID-19 pandemic, according to a March 23 executive order he signed as president and chairman and submitted as evidence by Racioppi. The lawsuit does not indicate whether Shinder had any role in the company prior to early 2020.
In the suit, Racioppi claims he was fired without cause and that he should be paid at a minimum the rest of his salary through 2021 as stated in his contract, a sum exceeding $1.2 million. Shinder has argued that the executive order firing all existing staff did not pertain to Racioppi and that the CEO subsequently quit.
Shinder made the news in 2018 when he was identified by journalists as the person behind the fake profile of an American citizen named Glen Stark, who was supposedly running for secretary-general of the International Federation of Chess (FIDE) on the ticket of incumbent Kirsan Ilyumzhinov, who was accused of oppressive rule during his 1993-2010 tenure as head of Russia’s Kalmykia region and who once claimed to have met aliens on board a spaceship.
Ilyumzhinov, president of FIDE from 1995 to 2018, was hit with U.S. sanctions in 2015 for what Washington said was his role in funding Syrian President Bashar al-Assad’s government.
The Russian business newspaper Vedomosti reported in 2012 that Ilyumzhinov is friends with Bosov and Abyzov, who traveled to Kalmykia to vacation with him in 2010. Illyumzhinov also had a stake in Alltech’s telecommunications business, the paper reported at the time.
The same day he issued the executive order laying off all staff, Shinder formed a new three-person board that included himself, former federal judge Eugene Sullivan, and Sullivan’s son, Eugene Sullivan II, a litigator.
The Sullivans are partners at Washington-based Freeh, Sporkin & Sullivan, a firm founded by Louis Freeh, a former federal judge and former FBI director from 1993 to 2001. The firm focuses on issues that include Foreign Corrupt Practices Act, internal investigations, and business due diligence.
The Sullivans have previously been hired as a third party to investigate allegations of wrongdoing at companies owned by businessmen from the former Soviet Union.
Eugene Sullivan declined to answer RFE/RL questions about his work with Genius Fund when contacted by phone. His son did not reply to a message sent through social media.
The first executive order of the new Genius Fund board was to launch an investigation into “possible fraud and negligence” at the company, setting aside $2 million for an audit of its books.
John Schroyer, a California-based reporter for the Marijuana Business Daily, said he was shocked to hear that an individual had invested $165 million into a cannabis company.
“I cannot recall a single instance of a single angel investor giving that much money to a single [cannabis] company,” Schroyer, who has been covering the industry since 2014, told RFE/RL.
Racioppi asserts in the lawsuit that Bosov, who had major expansion plans for his Siberian coal business, was not just a passive investor in the cannabis fund.
Rather, he claims Bosov relocated to California in the fall of 2018 to help run the start-up, snapping up a $30 million home in Beverly Hills in the process that was paid for in cash.
However, the United States canceled Bosov’s visa in April 2019 and he left the country the following month, Racioppi claims, adding that he spoke with the billionaire about how to resolve the visa issue.
Bosov, who kept a low profile in Russia and was rarely mentioned by the national media, was investigated “multiple times” by U.S. federal authorities and was questioned three times by the FBI and State Department, including once in Italy, where he has a home, the lawsuit claims.
The court documents state no reason for any alleged investigation. The U.S. State Department declined to respond to an RFE/RL request for comment. The FBI did not immediately respond to a request for comment.
Cannabis is still illegal at the U.S. federal level and that could have played a role in the visa cancelation, said Andrei Romanenko, an immigration lawyer based in California.
In 2018, the U.S. Customs and Border Protection warned foreigners against coming to the U.S. to pursue involvement in the cannabis industry, and the U.S. Citizenship and Immigration Service issued a similar warning around the time Bosov’s visa was canceled.
Birth Of Genius
In his attempt to prove that the firings were triggered by losses caused by mismanagement rather than by COVID-19, Racioppi makes several assertions about how executives ran the company, painting a picture of profligacy and questionable decisions.
He claims Genius Fund had no clear strategy to make profits and that executives wastefully spent money, including on Tesla cars, same-day business-class tickets, dozens of computers for workers they had no plans to hire, and daily lunches for staff that regularly cost more than $1,500. He says the company also overpaid for property.
“GFG failed to generate any substantial revenue during virtually its entire existence and has survived only through periodic cash infusions from certain well-funded foreign Defendants. When those Defendants finally realized the enormity of GFG’s outstanding debts and financial mismanagement, they began rapidly transferring GFG’s ownership and assets to shell companies in order to evade their creditors,” he claims.
Racioppi says he agreed to become CEO in March, replacing Stiegler, and signed a contract for $700,000 a year with an annual bonus of no less than half his salary, implying total take-home pay of more than $1 million. He was also to receive a $300,000 signing bonus. Court documents submitted as evidence indicated the company’s corporate counsel was paid $500,000 a year.
A report issued by CannabizTeam, a headhunting firm, indicates Genius Fund spent lavishly on salaries. Their report gave a nationwide cannabis CEO salary range of $165,000 to $220,000 with Los Angeles-based companies paying about one-third more. The general counsel pay range was $120,000 to $154,000.
Anonymous posts on the website Glassdoor in 2019 by people claiming to be Genius Fund employees and job applicants seem to support some of Racioppi’s claims.
Several highlighted free breakfasts and lunches, while others wrote about what they said was a lack of experience and direction on the part of executives.
“Who’s the boss is a question nobody could answer,” read a post from September by a person that claimed to have had an interview at the company.
Tried It Before?
Genius Fund may not have been Bosov’s first foray into the emerging U.S. cannabis business.
Russian media outlet RBC cited an unidentified banker as saying that Bosov once boasted to have made $500 million on cannabis, perhaps explaining why he was then willing to risk so much into one company.
Racioppi’s lawsuit claims that Stiegler and Borden convinced Bosov to invest in Genius Fund.
It is unclear how they were able to reach Bosov, much less get an audience with him, and whether Danny Abyzov played a role in connecting them.
Neither Stiegler nor Borden had relevant experience working in the cannabis industry, according to their LinkedIn pages. Stiegler and Borden did not respond when contacted via social media for comment.
The U.S. cannabis industry has been on a rollercoaster ride the past few years reminiscent of the dot-com boom and bust of the late 1990s and early 2000s
U.S. states have slowly begun legalizing medical and recreational marijuana, creating new, billion-dollar markets literally overnight and attracting investors from around the world.
Much like the dot-com craze, when investors scooped up stock in any company that operated in the emerging Internet sphere, money has poured into private and public companies involved in cannabis almost regardless of management’s industry knowledge or experience.
Lawyers, tech entrepreneurs, doctors, former law enforcement, and former government officials were among the people snapping up coveted cannabis licenses needed to launch a legal business. They turned to investors to help them get their new businesses off the ground.
The United States’ legal cannabis market is expected to surge to nearly $34 billion by 2025 from just over $12 billion last year, according to a 2020 report by The Arcview Group, as more states open and more individuals try the narcotic in one form or another.
The industry is expected to — and already has — made a lot of people rich. By April 2019, shares of Canopy Growth, one of the first companies to list its stock, had risen as much as 2000 percent.
California, as the largest state by population, is a key piece to that industry growth and naturally a target for investors with deep pockets.
Bosov was just one of several super-rich Russians drawn to the U.S. cannabis industry, whose potential for immediate and massive personal wealth creation some have likened to the advent of capitalism and opening of the economies of Russia and its neighbors after the 1991 Soviet collapse.
Another Siberian businessman, Andrei Muravyov, the former president of a cement company, has also invested in the California cannabis industry.
However, Bosov began to invest in Genius Fund in about the fall of 2018, according to the lawsuit, close to the top of the cannabis bull market, which reached its peak in terms of valuations in early 2019 and has since crashed. Shares of Canopy Growth, for instance, have fallen by two-thirds from its top last year.
Genius Fund sought to become a vertically integrated company with cultivation, manufacturing of products, including edibles and CBD, and distribution through its own retail shops.
The company went on a hiring spree, launched its own luxury brand called Gen!us and opened its flagship store on Melrose Avenue, one of the most popular and expensive thoroughfares in Los Angeles.
Genius Fund had three licenses, two of which it purchased, while five more from the state were still pending, Benjamin Kingston, corporate counsel for the company, posted on his LinkedIn page.
A cannabis retail license in prime Los Angeles locations cost as much as $20 million on the secondary market, Sean Maddocks, a managing partner at California-based cannabis consulting firm Green Consulting Partners, told RFE/RL.
Genius Fund also bought the Melrose property.
Racioppi claimed that Genius Fund overpaid for the properties it purchased, but Maddocks said restricted cannabis zoning has led to “usury” real-estate prices in California.
“The cost to get up and running a cannabis business are intensive and it starts with real estate. People are paying double or triple market rates for large-scale cultivation facilities,” he said.
The other “large problem” causing cannabis companies to fall is overpaid executives, he said. Bosov’s deep pockets may have contributed to the issue at Genius Fund, he said.
“A $100 million [investment] is just almost monopoly money and you can understand why people were asking for million-dollar salaries,” he said.